Jan. 24 (Bloomberg) -- Telecom Corp. of New Zealand's AAPT unit in Australia is in merger talks with PowerTel Ltd., owner of that country's second-largest fixed-line broadband network, the New Zealand Herald said, citing a person familiar with the situation it didn't name.

AAPT already has a partnership with PowerTel and a merged company would be in a stronger position to challenge Telstra Corp., Australia's largest telephone company, and Singapore Telecommunications Ltd.'s Optus unit, the second largest.

AAPT's earnings were dented after Telstra last year raised prices for access to its network. In November, AAPT signed an agreement to gain access to PowerTel's network, allowing it to cut costs and offer more services.

``When we announced the wholesale agreement with PowerTel, we said that we would continue discussions with them around the relationship,'' Telecom spokesman John Goulter said from Wellington today. ``We are continuing to talk with them about that relationship.''

Goulter declined to comment on speculation about a merger.

Sydney-based PowerTel is focused on infrastructure and has a network covering about 50 percent of AAPT's residential customers and 65 percent of its commercial customers. Telecom Chief Financial Officer Marko Bogoievski said in November that the relationship may develop as AAPT restructures to focus more on providing services.

Shares of Telecom, New Zealand's largest telephone company, rose 1 cent, or 0.2 percent, to NZ$5.12 at the 5 p.m. market close in Wellington. PowerTel added 6 cents, or 2.9 percent, to A$2.10 in Sydney.

Telecom may be trying to thwart plans by Optus to take over PowerTel, the Herald report said. Telecom would gain a negotiating position should Optus bid for PowerTel, the newspaper said, citing ABN Amro analyst Ian Martin.

To contact the reporter on this story: Tina Morrison in Wellington tmorrison3@bloomberg.net

Last Updated: January 23, 2007 23:14 EST